Leighton moves to pacify investors

Stephen Johns
says he knows exactly when
Leighton Holdings
started to lose control.

“When Wal King and Dieter Adamsas were heading up Leighton Holdings, [risk management] probably was fairly proactive," the Leighton chairman says. “But it did morph into something that was not proactive . . . and Leighton Holdings became more of a passive recipient of information."

At Leighton’s annual general meeting tomorrow, Johns will try to pacify investors tired of constant bad news by explaining how the board and the group’s holding company, which oversees nine operating units, plan to reassert their authority over the troubled contractor.

Johns denies Leighton was at fault last year when it reported a $907 million group write-down shortly after telling investors to expect a healthy profit. This is despite the company later being fined $300,000 by the Australian Securities and Investments Commission for not disclosing problems with its projects earlier. “We do not agree that we infringed our obligations on continuous disclosure," he says. He says ASIC did not understand the “complexity" of Leighton’s business model and devolved corporate structure.

Paying the fine was a “pragmatic" decision taken to prevent management’s attention from being diverted from running the business, he says. “$300,000 is less than one or two months’ legal fees and we would have been going for 36 months or longer."

Nevertheless, when Johns joined Leighton’s board as a non-executive director in 2009, some two years after Adamsas retired as deputy chief executive, he was surprised at how independent each of the operating companies were.

Not only did they have their own management teams, project review teams and bid against one another for contracts, they also ran their own travel budgets, IT systems and accounting.

“It was highly unusual," Johns says. While the system initially worked when Leighton was a smaller group, a trend towards “reinforcing silos" had been taken to an extreme, he says.

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Johns and Leighton’s new management team, headed by
Hamish Tyrwhitt
, are now in the tricky position of trying to make the operating companies more accountable to head office without making the company too bureaucratic.

Johns is emphatic that Leighton cannot afford a repeat of the Airport Link and the Victorian desalination plant, which have incurred more than $1 billion of losses after being badly managed from the start. “Financially they’ve been a disaster."

He is also unhappy with the group’s Middle Eastern Al Habtoor venture. Although Tyrwhitt has been making frequent trips to the Middle East – assisted by Arabic-speaking Australians – to try to recover some $500 million in owed payments, if the venture were to go broke Leighton would have to write off some $1 billion due to loans it has extended.

Leighton is still hoping to restore the financial health of the joint venture so it can be “IPO ready" by 2016 and potentially be sold off, Johns says. But in future Leighton plans to be much more circumspect about what kind of projects it takes on. “We want to avoid the situation we’ve seen in the past, where one of the operating companies doesn’t really have the skill-set for what it is bidding on," Johns says.

He uses the example of Thiess to illustrate his point. He says Thiess was not the appropriate Leighton company to bid for the desalination plant because it had never built one before (unlike sister company John Holland, which was not involved in the tender).

To try to spot risks before they cause losses – and prevent its operating companies unnecessarily incurring tens of millions of dollars in bid costs – Leighton has established a new board committee, the tender review and risk committee. “We should have come out with it a long time ago," Johns says, pointing out such committees are common in other risky industries like banking and insurance. Four current board members will sit on the committee – engineer Robert Humphris, former Reserve Bank governor
Ian Macfarlane
(“if he doesn’t understand financial risk, none of us does"), engineer Wayne Osborne and lawyer Robert Seidler (an alternate for board director Frank Stieler.) Johns plans to add one more director to the committee.

While large projects worth more than $1 billion were taken to the board in the past, the directors did not usually have time to review them properly, Johns says. “When you have a board meeting that goes for a day and a half and you have a few big projects at the end, it’s not the same as if you had to specifically meet and discuss them."

The committee will review complex projects before tenders are submitted. Leighton also plans to develop into a “strategic management company" instead of simply being a holding company. “We will actively take an overseeing role and a proactive role with all of our operating companies, whether that be onshore or offshore."

This will not only cut costs by combining back-office services but create common “best practice" operating procedures, Johns claims. “That is a huge turnaround in the culture and in the attitudes of holding executives as well as the people at the operating companies."

The board plans to sign off shortly on a new code of conduct which will apply uniformly across the group (previously the operating companies wrote their own codes).

Johns also wants Leighton’s executives, typically engineers, to develop a better understanding of the requirements of working for a publicly listed company and the needs of its majority shareholders, Hochtief and Grupo ACS.

“We have got extremely capable people but we don’t have too many people with public company experience – there are only a small handful at the holding company.

“It’s probably a scary thing, but we’ve got nobody at the operating company level with any understanding of what it is to be a public company . . . having that broader business perspective is something we have to work on."

ACS last year replaced Leighton’s top management after acquiring Hochtief, getting rid of former CEO
David Stewart
and former chairman
David Mortimer
. ACS – which has seen its share price lose almost two-thirds of its value over the past 12 months as it struggles with the collapse of Spain’s construction market and some $9 billion in debt – also wants Leighton to stop taking write-downs, and is closely monitoring the Australian group.

“We’re probably getting close to the biggest item on ACS’s balance sheet when they trace it through," Johns points out.

Leighton is planning to further strengthen its management team by appointing a new general counsel/company secretary to replace Craig van der Laan, who left earlier this year. Recently hired Steven Fouracre, formerly of Qantas, will become treasurer.

Johns’ changes to Leighton’s remuneration practices – designed to address investor criticism of the extraordinary sums paid to King and other former executives – have already won support from proxy advisory firms. ISS, CGI Glass Lewis and the Australian Shareholders Association have all recommended investors vote in favour of the group’s remuneration report this year.

Johns says changes to the way the CEO is paid, including increasing the amount paid in shares and making two-thirds of Tyrwhitt’s package linked to incentive targets, will be reflected throughout the company, with other executives being transferred to new plans.

Leighton is also getting rid of retention bonuses and service arrangements. “We haven’t fully eliminated them but they are not part of the standard program. All the senior executive are either being paid out or restructured."

Tyrwhitt got $3 million in compensation as part of the winding down of his service arrangements. Stewart received $7.3 million in termination benefits, while King was up for $24 million in termination payments before the board cancelled a $5 million bonus for overseeing the “transition" to his successor.

Leighton is understood to be still reviewing King’s $6 million consultancy contract. King has not done any work for the company since retiring at the end of 2010 but is likely to return as a consultant if a new contract can be negotiated.

If King does return, it will be as a sounding board for Tyrwhitt, who Johns says has the “full support" of the board. “Hamish comes out of the Leighton culture, which is good; it would have been difficult to bring someone in totally from the outside. But he realises Leighton now needs to be managed and structured differently."